Bombay HC rules in favour of Vodafone in transfer pricing case

The Bombay high court on Friday ruled that Vodafone would not have to pay income tax of Rs 3,200 crore on shares it had issued to its UK-based parent. Tax experts and industrialists said the verdict would send positive signals to foreign investors and improve the business climate in India.

The Bombay high court on Friday ruled that Vodafone would not have to pay income tax of Rs 3,200 crore on shares it had issued to its UK-based parent. Tax experts and industrialists said the verdict would send positive signals to foreign investors and improve the business climate in India.

This order is not related to another R20,000-crore dispute that Vodafone has with the government over the retrospective levy of income tax on its purchase of Hutchison Essar Telecom Services in 2007.

Friday’s case relates to the addition of R3,200 crore to the tax liability of Vodafone India Services Pvt Ltd for 2009-10. The I-T department had contended that Vodafone India had undervalued shares it had issued to Vodafone plc and that the difference between the actual value of the shares and what Vodafone plc paid its Indian subsidiary was a disguised loan and, hence, liable to be taxed under transfer pricing provisions.

Vodafone disputed this contention and went to court.

Transfer pricing is the price at which a parent company buys or sells goods from or to its subsidiary. The law says this price has to be the same as that charged from outsiders. Disputes arise when the pricing is opaque or the exact price of the goods transacted is unclear.

A division bench of chief justice Mohit Shah and justice MS Sanklecha said, “We feel that there is no taxable income on share premium received on the issue of shares.”

The judgment could have a bearing on 26 other similar cases involving Indian and multinational companies such as Nokia, Shell India, IBM Corp, the Essar group, Sanofi and Havells India.

A senior official in the finance ministry said, “We will comment only after studying the verdict.” The final decision on whether to file an appeal will be taken by the Central Board of Direct Taxes.

Hailing the verdict, senior counsel Harish Salve, who represented Vodafone, said, “It was a complete frivolous case by the income tax department.”

In an emailed statement, Vodafone said, “We have maintained consistently throughout the legal proceedings that this transaction was not taxable. We welcome the decision of the Bombay high court.”